The critical processes that will decide success or failure for startups are their lead generation and conversion tactics. For a startup to succeed, each lead generation and conversion tactic results in month-over-month increasing sales from launch to the breakeven point. Most lead generation and conversion tactics will not work right after launch because they are based on flawed assumptions.
To create lead generation and conversion that will result in breakeven sales, you must start testing them as soon as you launch your business.
The First Startup Milestone: Breakeven
Every startup has to be clear on its first milestone, surpassing the breakeven point.
The breakeven point is where revenues equal expenses (you'll find this structure on the profit and loss statement). If startup sales don't surpass the breakeven point, then the business experiences a loss and must bring in cash from an outside source to pay those bills. If the business revenues exceed expenses, it makes a profit. This is why the breakeven point is the first milestone of any new business.
To do this, startups create lead generation and sales tactics that bring in new customers and revenues. A lead generation tactic is your way of attracting prospective clients, and a lead conversion tactic is your way of making a sale. Few startups launch with these methods all figured out.
The breakeven equation simplifies things for us. It says that to reach profitability (and stability), we have to market and sell enough of our product or service to generate sufficient revenues to cover all of our startup business costs (including our income).
Here is a simple breakeven chart to illustrate the point:
Let's say we are selling t-shirts for $30 each (price) out of our home. It costs us $15 to create and deliver them (variable costs) to our customers. Further, our fixed costs (overhead) are $500 a month (keeping the math simple here). What is our breakeven point?
We use the following formula:
Fixed Costs ÷ (Price Per Unit - Variable Costs Per Unit) = Breakeven Point (Units)
Or
$500 ÷ ($30-$15) = 33 Units
We can also calculate how much we need to make in dollars:
Sales Price Per Unit x Break-Even Point in Units = Break-Even Point in Dollars
Or
$30 X 33 = $990 Dollars
So, our t-shirt business has to sell 33 t-shirts or $990 dollars a month to cover fixed monthly expenses.
Typical Startup Scenarios
The breakeven formula is good for telling us when a business reaches viability but doesn't tell us how long it will take to get there. We need a different way of looking at the breakeven point to include the revenue growth factor. We can create a chart to measure our revenue growth progress towards the breakeven point.
Here is what it looks like:
We have months along the horizontal axis and revenues along the vertical axis in this chart. We start with the day we launch and start tracking actual revenues each month (even the smallest businesses can track monthly revenues). We see a steady progression towards $990 a month in revenues in this case. This scenario is what most new entrepreneurs expect to see, and revenues rarely grow in a straight, smooth line.
It rarely works that way, however.
More likely, your startup will take one of three possible paths: 1) perform as expected, 2) fail, or 3) underperform.
Which scenario you follow is determined mainly by what lead generation and conversion tactics you use after you launch.
Let's look at each scenario.
Scenario #1: Performing As Expected
If a new business owner has previous experience with marketing and sales tactics, they have a good idea of what works already. They need to focus on tweaking their tactics to fit their new business.
Here is what a typical pattern looks like:
Here is the breakdown (by months):
- Months 0-3: Implementing marketing and sales tactics with explicit assumptions. They will pay close attention to their tactics' results and use it as feedback for further refinements.
- Months 4-9: Marketing and sales tactics begin to result in month-over-month sales traction.
- Months 10-12 (and beyond): Sales are consistently above the breakeven point and start the first plateau.
This scenario represents about one out of ten small business startups I observe.
Scenario #2: Failure
The main reason a business fails is that it runs out of cash. In small businesses, it happens quickly, usually between months three and nine. Marketing and sales tactics are based on what is assumed to work with no performance tracking. Sales sputter out of the gate and never reach breakeven.
Here is what the scenario looks like in chart form:
Here is the breakdown:
- Months 0-3: Sales sputter, and available cash is burned on monthly expenses, inventory, and supplies. Marketing and sales tactics (paid for or not) fail to generate the required volume of revenues. The business owner is engaged in severe firefighting and looks to others for cash infusions.
- Months 4-9: With each passing month, the situation becomes direr, and funding options dwindle. The owner decides to close the business and stem further losses or is forced to close the business by running out of cash or by vendors withdrawing support.
- Months 5-12: Business closes.
This scenario represents two in ten startups I observe.
Scenario #3: Underperforming
The underperforming scenario is the most common one I see (about seven out of ten startups I see). A startup that is not making significant progress towards the breakeven point is underperforming. It is easy to tell by the up and down pattern of revenues over time (I call it the "hacksaw pattern"). If this scenario goes on for a long time, I will often see business owners asking for loans, using credit cards, or asking friends and family for loans.
Here is what the underperforming scenario might look like:
Here is the breakdown:
- Up and Down Sales: There are good months, bad months, and awful months. Sales growth is mediocre or non-existent.
- Frequent Cash Infusions: The business needs cash from others to pay the bills as the owners work harder and harder to try and make ends meet.
- "One Trick Pony": The business owner often has just one way of moving forward and does not deviate from that plan. The idea is that with hard work, success will come (and it often doesn't).
- Lack of Marketing/Sales Tactic Development: The business owner often focuses on the day-to-day tasks and not on developing in leads and making sales.
Discover What Marketing And Sales Tactics Work For You
If you are starting a business, you will quickly see one of the above patterns emerge (assuming you're paying attention). If you find the underperforming or failing patterns emerging, your lead generation and conversion tactics are likely culprits.
Remember this: most of your marketing assumptions will be wrong. You need to test, hone, or eliminate them. The sooner you have tactics that work, the sooner you will get to the breakeven point!
Here are the steps you can use to test your tactics:
Step 1: Identify Lead Generation or Conversion Tactics
Identify the lead generation and conversion tactics you plan to use. For example, you identify Twitter as a lead generation tactic. You believe your customers hang out there, and you can test whether Twitter brings in leads to your website or not.
Most small-scale startups will have 3 to 5 marketing and sales tactics they will use at the start. A lead generation list it might look like this:
1. Social Media
2. Search Engine Optimization (SEO)
3. Email Marketing
4. Paid Advertising
Once you have identified your list, then you need to identify how you think they will work.
Step 2: State Your Assumption About How It Works
Assumptions are the untested facts we make about how something works. For example, "If I make a tweet on Twitter, I expect people to click the link to my blog post."
Tactics --> Results
If you are unsure of your assumptions, ask yourself what the expected result will be, and then work backward to figure out how you got there. Write out what you expect to happen and why or how it will happen for each of your tactics.
Step 3: Design An Experiment
Let's go back to the Twitter example: "If I make a tweet on Twitter, I expect ten new people to click the link to my blog post." How do we know if it happened?
Often Google Analytics will measure this action (I'm keeping the explanations simple here) by reporting how many people went from social media to a specific landing page (or blog post in this case). Our experiment might look like this:
If I post my blog post link three times a day for one week on Twitter I expect 20 new visitors to my blog post page.
You execute your plan and pull a Google Analytics report at the end of the week. What happened? Did you surpass your expected results? Were your actual results less than what you expected?
Step 4: Keep, Refine, or Eliminate The Tactic
Once you have data from your experiment, you have three choices for your next step:
- Keep the Tactic- Make no changes to the marketing and sales tactic and keep using it to grow revenues.
- Refine the Tactic - You may learn something from the experiment that allows you to refine the marketing tactic. Make the changes and run another experiment.
- Eliminate the Tactic - The results may be so dismal that you decide to abandon using the tactic and try something completely new.
Run your experiment on each of your marketing and sales tactics and monitor your overall revenues. Are you starting to see positive changes? If so, why? What's working in your view? If not, why not? What do you need to change?
Final Thoughts
The critical processes that will decide success or failure for startups are their lead generation and conversion tactics. For a startup to succeed, each lead generation and conversion tactic quickly results in month-over-month increasing sales from launch to the breakeven point. Most lead generation and conversion tactics will not work right after launch because they are based on flawed assumptions. Test them and keep testing them until you get the results you need.
Thoughts? Comment below!
